 What is cryptocurrency? To understand this, we have with us Bappa Sinha who explains what is a digital token as currency as opposed to a state backed currency. We will also talk about different kinds of cryptocurrencies that are there. We should ideally start talking about what cryptocurrencies are not. So, when we talk about regular currency, whether it be US dollar, the Indian rupees, the Euro, these are all currencies which are backed by states, by sovereign states. And the central bank of a country or let's say in case of Euro, the European central bank is responsible for creating the money, the currency and for maintaining the money supply within its domain. Cryptocurrencies are not backed by any state. They are by definition decentralized. So, it is the crypto network, right? So, let's say the popular cryptocurrencies are things like Bitcoin, Ethereum. So, the Bitcoin network is responsible for creating the bitcoins and is also responsible for validating when bitcoins get transferred between two parties. Now, the sanctity of the Bitcoin itself is maintained through cryptography and that's why they are called cryptocurrencies. Now, there is this process called mining. So, you have heard about Bitcoin miners and stuff like that. So, the miners are people with effectively very powerful computers who run these complex algorithms. And the job of the algorithms is to one create, well, one validate a transaction between two parties and also to create new bitcoins. And then the same is true with the other kinds of cryptocurrencies like Ethereum, Beyonce coin, Solana and there are many other such coins. So, that effectively is what cryptocurrencies are. Is the rise in Bitcoin and other cryptocurrencies justified or is it a bubble? Do they have any inherent value? Is their rise driven purely by speculative media? Yeah. So, that is the billion dollar question or like three trillion dollar question. Now, the reason I say three trillion dollars is that the total market cap of all cryptocurrencies combined is estimated to be about three trillion dollars. Now, that's a huge amount of money, right? That's not like some hobbyist putting in their pocket chains. That is where institutional money has come in. Now, so unlike a regular currency, unlike, let's say, for the US dollar, the US government backs the US dollar, right? So, and that's true about all other currencies that it is created by government fiat. And so, the government backs the currency. And that's what gives value to the currency, right? So, you, so just to be, just to clarify, you think the US dollar has a certain value because you have an inherent trust in the US government that they will not let that currency depreciate beyond a certain level, okay? Now, currency is historically like, for example, gold and silver and other precious metals have a value associated with them because, because gold has an inherent value. Now, in case of, or other commodities, they have inherent value because they are useful for some purpose in society and that gives them value. Cryptocurrencies are not backed by any state and they don't have any inherent value, right? They're just digital tokens. So, their value is whatever the people investing in cryptocurrencies make it out to be. People have now started saying that it could, it potentially could be a bubble, right? It's, its value keeps on going up just because its value has been previously growing up. Now, the reverse could also hold true, right? I mean, there are parallels to this in history. For example, in the 1600s, there was something called the tulip mania, where tulip, like the flower, were bid to exorbitant prices in the world market because people were speculating on tulips. And, and so, for, for, for a few years, the value of tulips went on growing exponentially. And then people suddenly lost faith in it and it collapsed. The same happened in the 1700s with what is called the South Sea bubble and even very intelligent people like, like Isaac Newton, the famous scientist. He had invested in, in, in that bubble and it is rumored that he lost money. So, cryptos could very well be just that. Now, people, the supporters of cryptos say that this kind of currency will eventually become the primary mode of transaction, right? And this is kind of driven by the fear about, about the banking system, which was caused by the Great Recession of 2008 and by a distrust in the central banks, right? So, they are kind of using that fear to say that, okay, here is a currency which cannot be devalued by central banks. There is a hard limit on how many cryptocurrencies you can create. For example, in case of Bitcoin, you can, you are only ever going to have 21 million Bitcoins. And it is rumored that at the current rate at which Bitcoins are created by 2140, all Bitcoins would have been mined and no new Bitcoin would ever be created. So, now you have a scarce resource and which has been bid up and that is what is causing this exponential growth. But does it really have a value in real life, right? I mean, can it really be used for transactions? Now, there you have a problem, right? Because the total number of transactions which the crypto, which the Bitcoin network, for example, today supports, it is estimated that you can't do more than like five or six transactions per second globally, right? There is, there are estimates that max you can go to, let's say, somebody has estimated that you can go to seven transactions per second globally, which is, which doesn't meet the requirements of the global economy. For example, the Visa system, right? We are familiar with the Visa credit card. They can handle 24,000 transactions per second, right? So, that's what, and Visa is just one of many credit cards, right? So, that is kind of the the requirements of the global economy. So, crypto replacing traditional transaction mechanisms, it seems far-fetched and unlikely. Now, outside of that, it's also very volatile. So, when you, there are other people who argue, you know, it's not, you can't use it for transactions, but it's a store of value. But given that it kind of fluctuates like 50% down, 50% up, how is it even a store of value? So, then it, I mean, the only conclusion you're left with is that it's a pure speculative mania. China has banned all cryptocurrency operations and even cryptocurrency mining. Many other countries have put restrictions on cryptocurrencies, while also regulating it in different ways. Despite all this, El Salvador has adopted cryptocurrency as one of its official currencies. What has prompted this move? And how is that working out? So, we have to separate out what El Salvador is doing from what other countries are doing, right? Like, for example, China has declared that they will launch the digital one. Now, that is separate, right? That is a currency which is backed by the Chinese central bank. El Salvador has decided that Bitcoin is going to be used, is a valid legal tender. It's a valid currency for transactions happening in El Salvador, right? In fact, vendors within El Salvador are mandated to accept Bitcoin as a currency. Now, so, we need to look at El Salvador as a special case. And it is a special case because frankly, it has a kleptocratic regime which is authoritarian and which faces an economic crisis. Now, this actually dates back to far before cryptos came into existence. In 2001, El Salvador basically dollarized their economy. So, they basically said that the US dollar is a legal currency which can be used inside El Salvador and now all transactions within El Salvador use the US dollar. So, their local currency is no longer used, right? And now, what that causes is it causes a problem in that your country's central bank loses control of its money supply because it's not like the El Salvador central bank cannot literally create US dollars, right? US dollars are created by the US central bank. So, hence, when a country loses control of its money supply, it gets into a very difficult position that it cannot regulate its economy. Typically, when economies are either overheating or it's going into a recession, you reduce or increase the money supply which central banks can do. Now, if a central bank loses control of its currency, then it can no longer do that, right? And so, that results in economy which is effectively out of control, right? And El Salvador's economy has been suffering, it hasn't grown as much as its neighbors have grown. The other thing is El Salvador, their estimates that they need about 500 million dollars to address their budget deficit. Now, because they don't have a central bank which controls a currency, that cannot be financed by just printing money, right? It has to be got from private investors. And El Salvador has been in talks with the IMF and they are facing challenges there. One of the reasons they are facing challenges is that their government fired the attorney general and five justices of the Supreme Court, after which their bonds have effectively collapsed, right? So, their bonds which are kind of maturing in 2025 now have an interest rate of 25%, which makes it unviable to borrow money using that route, right? So, it's almost like a publicity gimmick which their president is doing by saying that, oh, we are going to now accept bitcoins or rather, we are going to force our people to accept bitcoins. And they're raising a billion dollar bond, which they call the bitcoin bonds. And what they're going to do is 500 million dollar of that, they're going to use in installing bitcoin infrastructure, right? Mining machines and stuff like that. And the other 500 million dollars they're going to put in bitcoins for five years. And the promise is that after five years, if there are any gains from that 500 million dollar bitcoins they have purchased, that will be equally shared between the investors and the government. Now, if you look at this, this is a pure gamble, right? So, if the value of bitcoin goes up like it has been going up exponentially for the past few years, there will be a bin fall gains for the government and the government can use that to fix its budget deficit. But if the price of bitcoin either stagnates or fall, then El Salvador is in a world of pain, right? Because they will go further into debt for this whole thing that they've created. So, I don't think we should really look at what El Salvador is doing as kind of what other countries will do.